FD/U2 Topic 10 Valuation of Individual Contracts

“Intangibles” such as customer goodwill, name recognition, and customer lists are valuable non-material assets that can be appraised just like physical equipment, real estate, accounts receivable, and securities. In order for your business to be successful, you’ll want to understand the importance of intangibles. Below are some of the most important intangible assets, and some ways they are valued.

Brand Names or Trademarks: Brand names and trademarks can be extremely valuable. Some, such as “jello,” “xerox,” and “kleenex” have nearly become generic terms. A common valuation method is based on how much more a company can charge for its products than relatively unknown competitors.

Contracts: Certain contracts, such as employment, affiliation, advertising, or sales contracts, can be treated as intangible assets because they add value to a company. For example, a long-term lease at below-market rates can represent a huge overhead savings. Or, when a business is sold, the president of the selling company may contract to remain for a certain period. This contract is valuable because it saves the cost to replace the president with a new executive who would have to learn the business and take time to become as effective. Other types of valuable contracts might be subscription contracts (for example, a cable company’s revenue is based largely on subscriptions) or long-term service contracts sold by the company.

Franchises and Other Licenses: Franchises that are well-recognized and have a long track record are valuable. One common way to value franchises is based on profit advantage over similar businesses by virtue of the franchise.

Goodwill: Goodwill is based on your company’s reputation and relationships with customers, vendors and the community, and its participation in trade-related activities. In broad terms, goodwill is a measure of your company’s reputation, and of how willing these individuals would be to continue doing business with your company. Goodwill is often lumped with other intangibles in valuation because it can be difficult to separate the value of each intangible. At a base level, goodwill can be considered the value of having an established business, so that a buyer would not have to assemble the business and seek customers from the ground up.

Patents and Patent Applications: The value of a patent depends on its economic and legal lifespan. The value of a patent application depends on the strength of its claims.

Proprietary Lists: Many types of lists, such as customer or subscription lists, are often compiled for internal use, bought, or sold. Lists are especially valuable if they represent ongoing business relationships. For example, if a newspaper gets 80 percent of its advertising revenue from companies on a customer list, that list is a critical business tool. Values may be based on the cost to replace a list, or the repeat sales generated.

Secret Processes, Methods, and Formulas: Often these assets are not patented, and valuation must be made based on profit advantage or cost savings provided by the asset. Because these assets are volatile-secrets are precarious-an appraiser’s judgment often plays heavily in these valuations.

Tax Credits For Past Losses: The IRS allows certain losses to be carried back or carried forward. If a company has losses, they may be carried forward for a certain number of years to offset profits, resulting in a tax saving. The anticipated tax saving can often be estimated, providing a value for this asset.

Technical Libraries and Other Specialized Information Repositories: Many libraries contain nearly irreplaceable material, and can be extraordinarily difficult to recreate. These assets are often valued by the cost of recreating them, minus losses for obsolescence.